In recent years, there has been a number of workplace law amendments that affect franchisors.
These amendments greatly influence the way in which a franchisor is legally liable for the actions of a franchisee. They serve as a guideline to help the Fair Work Ombudsman determine whether a franchisor is legally liable or not. If found liable, a franchisor may be subject to enforcement action, fines, and penalties in accordance with the Fair Work Act 2009 (FW Act).
To help you understand what these amendments mean to franchisors, and how to prevent the risk of a franchisee breaching Australian workplace laws, read on. But first, let’s define exactly who a franchisor is.
Who is considered a franchisor?
Under the FW Act, there are three primary factors that determine whether an entity is considered a responsible franchise entity or not. They are as follows:
- Entity must be a franchise owner
This means a franchisor allows another business to use their branding, trademark, and brand reputation in order to sell their products and services and generate an income.
- The franchisees’ must be substantially or materially associated with the intellectual property related to the franchise
This means a franchisee uses a major portion of a franchise brand, including the trademark, logo, and marketing in order to promote and operate their business.
- The franchisor has considerable influence or control over how the franchisee runs their business
The franchisor plays a major role in how each franchisee runs their business. They may assist in the daily operations of each business in a number of ways, including their products and services, branding, marketing, logos, hours worked by employees, sales targets, quotas, business expenses, and more.
In addition to this, the franchisor not only influences how each franchisee is run, but also financially contributes to the daily operations of the franchisees.
Types of offences (contravenes) a franchisor is responsible for
Under the right circumstances, a responsible franchise entity may be legally liable for contraventions done by a franchisee which violate the provisions of the FW Act.
These include contraventions that violate the:
- Entitlements under the
- National Employment Standards
- Awards and agreements
- National minimum wage orders, equal remuneration orders and guarantees of annual earnings
- Rules and methods that relate to frequency of payment
- Record keeping
- Documenting and providing of payslips
- Cases of sham contracting
When could a franchisor be liable?
Responsible franchise entities must take reasonable steps to ensure each franchisee is compliant with the FW Act provisions. Failure to do so could result in enforcement action, fines and penalties, for which the franchisor will be legally liable for.
A franchisor may be legally liable if they:
- Knew, or could have reasonably expected to have known, that a relevant contravention would happen, or
- At the time of the contravention, would have known, or could have reasonably expected to have known, that a contravention of this or a similar type was likely to happen, or
- Did not take reasonable steps to prevent the contravention or a contravention of the same or a similar nature
How franchisors can prevent workplace contraventions
To avoid being legally liable for a workplace contravention done by a franchisee, the franchisor must take reasonable steps to prevent all relevant contraventions that apply to their franchisees.
The Fair Work Ombudsman (FWO) takes into account several factors to decide if a franchisor has taken reasonable steps to prevent a workplace contravention. These include:
- The size and resources available to the franchisor
- The ability of the franchisor to influence or control the actions taken by the franchisee in regards to the obligations they failed to meet
- The procedures in which the franchisor put in place for the franchisee to handle complaints and disputes, such as instances of underpayment and breaches of workplace law
- The reasonable steps that the franchisor took (or did not take) in order to encourage, train and support the franchisee in regards to compliance with workplace laws
- Whether or not the franchisor had systems in place to regularly monitor the franchisee, including their compliance with all aspects of workplace laws, such as wages, payment, record keeping and more.
Simply monitoring the activity of each franchisee may not be enough to avoid legal liability. For those who are unsure if their processes and procedures are enough to avoid legal liability, they should take these extra steps:
- Make sure that workplace compliance is a key factor of your franchise agreement, or any other business arrangement you set up that requires each franchisee to comply with workplace laws
- Give franchisees the support they need to comply with workplace laws, and ensure that each franchisee has a clear understanding of their legal right and obligations
- Encourage franchisees to cooperate with any audits by the Franchisor or the FWO
- Make it easy for franchisee employees to directly report workplace issues, be it through phone or email
- Conduct regular remote and in-person monitoring of each franchisee, to ensure they are compliant with all relevant workplace laws.
Fines and penalties
When a responsible franchisor is found legally responsible for the misconduct of a franchisee, a court can make a range of orders. They may force the franchisor to pay compensation to the franchisee’s employees. The franchisor may also be forced to pay a penalty for each contravention.
The amount for each penalty can range from $13,320 for individuals and $66,000 for corporations.
Responsible franchisors are allowed to apply to a court to recover money from the offending franchisee in order to pay these penalties. The only exception to this rule is if the franchisor is required to pay penalties. In this case, the franchisor cannot recover from the franchisee under the FW Act.
Steps for franchisors to take now
Take the time to review the existing arrangements in place for your franchisees. Make sure there are systems, methods, and procedures in place to help reduce the risk of a contravention in workplace laws.
Franchisors can also access a wealth of free resources courtesy of the FWO, which can help them better understand their legal rights and obligations; not just for themselves, but also for participating franchisees.
For more information on franchisor responsibility and liability click here.
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